Should Netflix (NFLX) be on your list of stocks to buy?

Netflix (NASDAQ:NFLX) has mystified the market throughout its history.

The streaming service has soared nearly 30,000% since its 2002 IPO, but the stock wasn’t always an obvious winner. It crashed in 2011 during the “Qwikster debacle” when the company separated its streaming and DVD-by-mail services. Even today, the stock has plenty of critics who believe it’s overvalued and say that its model, which is currently dependent on burning billions in cash, will eventually crumble.

Netflix’s competitive position always seems in flux, and today is no different. With competition from the likes of Apple and Disney (or even AT&T following its WarnerMedia acquisition), Netflix’s streaming supremacy no longer seems guaranteed. Where will the company be in five years? Let’s take a look into the crystal ball.

Subscriber growth

Though Netflix stock price has never been easy to predict, the company’s business model is straightforward. Essentially all of its revenue comes from selling subscriptions to its video entertainment service. So the future growth of its business is highly dependent on adding subscribers.

Netflix completed its global expansion plan in January 2016, yet subscriber growth has continued to accelerate since then, improving every year since the company launched the streaming service in 2011. It added nearly 30 million members last year. Based on the company’s second-quarter forecast, it’s on pace to top that rate again in 2019.

Naturally, Netflix’s subscriber growth will peak at some point, as the addressable market is only so big. In the U.S., paid annual subscriber growth actually peaked in 2014 at a rate of 6 million, and has generally fluctuated between 5 and 6 million since then. However, in 2019 that figure appears to be slowing, as the company is set to add just 2 million domestic members through the first half of the year. Netflix has also reached the bottom of its long-term 60-90 million target range for U.S. subscribers. At its current pace, a fair range for Netflix’s subscriber count in 2024 seems to be 75-85 million. That would translate into annual subscriber growth of 3-5 million over the next five years.

International subscriber growth is more difficult to forecast. Netflix added nearly 23 million international members last year, and growth outside the U.S. is accelerating in 2019, with 12.6 million new members expected through the first half of the year. As Netflix plows more money into local, foreign-language content for the countries it serves, international growth seems likely to continue accelerating, but will eventually reach a market saturation point (just like in the U.S.). It follows then that Netflix will see annual growth of 25-30 million international subscribers over the next five years, and give the company 217-267 million paid subscribers outside the U.S. in 2024.

Price hikes

Along with subscriber growth, price increases are a key factor in Netflix’s top line. In the first quarter, Netflix’s average subscription price (ASP) per month in the U.S. was $11.64, as the company was in the process of rolling out price increases. Outside of the U.S., ASP was $9.32, though some of those subscribers are also seeing price hikes.

Based on recent history, Netflix is likely to pass along one or two price hikes over the next five years. Expecting prices to rise 20%-30% therefore seems reasonable. Starting with the $13 monthly price that the standard U.S. package now carries, that would mean U.S. annual ASP would reach $187.20-$202.80 by 2024. Internationally, using the current $9.32 ASP, the yearly price would rise to $134.16-$145.44 over the next five years.

Using the above numbers, the chart below shows what Netflix’s revenue might look like in domestic and international markets, based on worst-case, average-case, and best-case scenarios.

Projected Domestic 2024 Figures

Worst-Case Scenario

Average-Case Scenario

Best-Case Scenario

Subscribers

75 million

80 million

85 million

Annual Price

$187.20

$195

$202.80

Total Revenue

$14 billion

$15.6 billion

$17.2 billion

SOURCE: AUTHOR CALCULATIONS

Projected Domestic 2024 Figures

Worst-Case Scenario

Average-Case Scenario

Best-Case Scenario

Subscribers

217 million

242 million

267 million

Annual Price

$134.16

$139.80

$145.44

Total Revenue

$29.1 billion

$33.8 billion

$38.8 billion

SOURCE: AUTHOR CALCULATIONS

Combining those numbers, Netflix’s revenue in five years would be $43.1-$56 billion, representing a compound annual growth rate of 21%-27.5%.

The cost side

Negative free cash flow has become a concern for investors, as the company is projecting FCF of negative $3.5 billion this year, following an FCF loss of $3 billion last year. This means the company has had to take on substantial levels of debt to fund its original content production. However, Netflix now expects 2019 to be the trough in its negative free cash flow, and it sees margins improving each year starting in 2020. That signals that it should be free cash flow positive by 2024, and probably substantially so as its content spending plateaus.

Netflix spent $13 billion on a cash basis on streaming content last year, and that number is set to grow sharply this year as well. By 2024, $20-$25 billion in streaming content spending seems reasonable as content spending will slow. As that happens, spending in areas like marketing and payroll are also likely to decelerate. Forecasting Netflix’s costs is more difficult than forecasting its revenue, as the company has more control over expenses. But profitability is likely to increase, as the subscription model should naturally generate wider margins as more subscribers join the service. As long as Netflix slows content spending growth, profitability should surge over the next five years.

Other factors

Netflix isn’t operating in a bubble, of course. The company faces increased competition, and the success of those competitors could put a dent in the company’s growth, even though management has been correct about its overall resilience. Similarly, Netflix will have to continue to create quality content and make sure its subscribers know about it, as the competition for eyeballs is only increasing.

While Netflix’s business today is almost entirely based on its subscription video business, the prospect of optionality remains. Netflix could get into new business segments like movie theaters, sports, or video games that could create whole new revenue streams. Similarly, as the company makes more original shows, the potential is also there to gain incremental licensing revenue from things like toys and theme park rides, much like Disney does. Netflix has already arranged to license some of its original content to iQiyi, a Chinese streaming service, representing one way it can tap the massive Chinese market.

No one knows for sure where Netflix will be in five years, but what we know today is that its international business is surging, its presence at awards shows gets stronger every year, and the company has a massive head start on the incoming competition with 150 million global subscribers to its service. That kind of momentum, combined with its potent subscription model and as yet untapped growth options, paints a promising picture for Netflix in 2024.

Netflix Inc. shares closed at $360.35 on Thursday, up $5.61 (+1.58%). Year-to-date, NFLX has gained 34.63%, versus a 16.56% rise in the benchmark S&P 500 index during the same period.